companies with tradeable shares . The dot-com bubble was associated with the growth of internet trading , which allowed investors to buy and sell shares , day or night , from the comfort of their own homes . Perhaps the most notorious increase in marketability was the mass issue of mortgage-backed securities during the 2000s , which turned previously illiquid mortgage debt into an asset that could be bought , sold and speculated in .
The fuel for the bubble is money and credit . A bubble can form only when the public has sufficient capital to invest in the asset and is , therefore , much more likely to occur when there is abundant money and credit in the economy . Low interest rates and loose credit conditions stimulate the growth of bubbles in two ways . First , the bubble assets themselves may be purchased with borrowed money , driving up their prices . Because banks are lending other people ’ s money and borrowers are borrowing other people ’ s money , neither are fully on the hook for losses if an investment in a bubble asset fails . Second , low interest rates on traditionally safe assets , such as government debt or bank deposits , can push investors to “ reach for yield ” by investing in risky assets instead . As a result , funds flow into riskier assets , where a bubble is much more likely to occur .
Many historical bubbles have been preceded by interest rate cuts , expansions of the money supply , or financial deregulation that encourages banks to lend more . The Plaza Accord of 1985 , widely considered the catalyst for the Japanese bubble of the 1980s , explicitly encouraged Japan to commit to all three . Similarly , the Australian land boom of the 1890s was accompanied by low interest rates , an influx of money from Britain and a “ free banking ” system characterized by minimal financial regulation .
Although it is less common , the level of credit in a market can also increase due to an increase in demand for borrowed money . A surprising fact about the US stock market bubble of the late 1920s is that most of it occurred when interest rates were relatively high . As historian Eugene White has shown , the demand for margin lending was so strong by 1929 that investors were willing to borrow at higher and higher rates in order to buy as much stock as possible .
The third side of the bubble triangle , analogous to heat , is speculation : the purchase of an asset purely with the aim of
Renowned economist Irving Fisher , who is infamously known for declaring that stocks had reached “ a permanently high plateau ” on the eve of the Crash of 1929 .
selling that asset for a capital gain at a later date . Speculation is never entirely absent : there are always some investors who buy assets in the expectation of future price increases . However , during bubbles , large numbers of novices become speculators , many of whom trade purely on momentum , buying when prices are rising and selling when prices are falling . Just as a fire produces its own heat once it starts , speculative investment is self-perpetuating : early speculators make large profits , attracting more speculative money , which in turn results in further price increases and higher returns to speculators . The amount of speculation required to start the process is only a small fraction of that which occurs at its peak .
Anecdotal evidence has always suggested that this trading strategy is widespread during bubbles . During the Latin American mining bubble of 1825 , The Times described investors as a “ community of gamesters ” who “ engaged in schemes of all kinds , not with any consideration of what the undertaking was likely
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